M/s Sree Rayalaseema Green Energy Limited, Hyderabad V. DCIT, Circle-3(2), Hyderabad

CO 21/HYD/2014

• Counselvise Citation: [2014] 122 COUNSELVISE.COM (IT) 9847 (ITAT-HYDERABAD)
• Duration Of Justice: 4 month(s) 4 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 13-08-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 08-04-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: A V RAGHURAM
• Keywords: Business income; Cost of acquisition; Agreed addition; Assessment record; Right to appeal; Capital receipt

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A : HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA.NO.1612/HYD/2013 ASSESSMENT YEAR 2006-2007 DCIT, CIRCLE 3(2) HYDERABAD. VS. M/S. SREE RAYALASEEMA GREEN ENERGY LTD., HYDERABAD PAN AAECS-7075-A (APPELLANT) (RESPONDENT) C.O. NO. 21/HYD/2014 (IN ITA.NO.1612/HYD/2013 ASSESSMENT YEAR 2006-2007) M/S. SREE RAYALASEEMA GREEN ENERGY LTD., HYDERABAD PAN AAECS-7075-A VS. DCIT, CIRCLE 3(2) HYDERABAD. (APPELLANT) (RESPONDENT) FOR REVENUE: MR. R. MOHAN REDDY FOR ASSESSEE: MR. A.V. RAGHURAM DATE OF HEARING: 21.07.2014 DATE OF PRONOUNCEMENT: 13.08.2014 ORDER PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY REVENUE IS DIRECTED AGAINST THE ORD ER OF THE LD. CIT(A)-IV, HYDERABAD DATED 20.09.2013 FOR T HE ASSESSMENT YEAR 2003-2004. THE ASSESSEE HAS ALSO FI LED C.O. AGAINST THE SAID ORDER OF THE CIT(A). 2 ITA.NO.1612/HYD/2013 & C.O. NO. 21/H/14 M/S SREE RAYALASEEMA GREEN ENERGY LTD., HYD. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS : 1. THE LEARNED CIT(A) ERRED BOTH IN LAW AND ON FACTS OF THE CASE. 2. THE LEARNED CIT(A) OUGHT NOT TO HAVE TREATED THE SA LE OF CARBON CREDITS AS CAPITAL RECEIPT. 3. THE HONBLE CIT(A) OUGHT TO HAVE APPRECIATED THE FA CT THAT THE ISSUE INVOLVED IN THE APPEAL IS NOT THE TAXABILITY OF CARBON CREDITS, BUT ITS ELIGIBILITY F OR DEDUCTION UNDER SECTION 80IB. 3. BRIEFLY, FACTS OF THE CASE ARE THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF GENERATION OF POWER AND MANUFACTURING OF TRANSFORMERS. IT FILED ITS RETURN OF INCOME ON 26.09.2009 DECLARING AN INCOME OF RS.64,41,243 AFTE R CLAIMING DEDUCTION UNDER SECTION 80IA OF THE I.T. ACT AMOUNT ING TO RS.1,31,12,902/- ON THE PROFIT FROM SALE OF POWER. THE A.O. RECOMPUTED THE DEDUCTION U/S.80IA WITH REGARD TO SA LE OF CARBON CREDITS. THE TURNOVER ADOPTED BY THE ASSESSE E FOR THE PURPOSE OF SEC.80IA INCLUDED A SUM OF RS.20,27,430 REALIZED FROM SALE OF CARBON CREDITS. A.O. HELD THAT SINCE T HE SALE OF CARBON CREDITS HAD NO DIRECT NEXUS WITH THE BUSINES S OF GENERATION AND SALE OF POWER, IT COULD NOT BE SAID TO BE DERIVED FROM THE ELIGIBLE BUSINESS FOR DEDUCTION U/S.80IA(4 ), BY RELYING ON THE DECISION OF HONBLE SUPREME COURT IN THE CAS E OF LIBERTY INDIA VS. CIT (2009) 317 ITR 218 (SC). 4. AGGRIEVED, ASSESSEE FILED APPEAL BEFORE THE LD . CIT(A). BESIDES PUTTING FORTH THE CONTENTIONS RAISE D BEFORE THE A.O. IT ALSO RELIED ON THE DECISION OF THE COORDIN ATE BENCH OF THE TRIBUNAL IN THE CASE OF MY HOME POWER LTD. VS. DCIT (2012) 27 TAXMAN.COM 27 (HYD.) WHEREIN THE TRIBUNAL HELD AS UNDER : 3 ITA.NO.1612/HYD/2013 & C.O. NO. 21/H/14 M/S SREE RAYALASEEMA GREEN ENERGY LTD., HYD. 24. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. CARBON CREDIT IS IN THE NAT URE OF 'AN ENTITLEMENT' RECEIVED TO IMPROVE WORLD ATMOSPHERE A ND ENVIRONMENT REDUCING CARBON, HEAT AND GAS EMISSIONS . THE ENTITLEMENT EARNED FOR CARBON CREDITS CAN, AT BEST, BE REGARDED AS A CAPITAL RECEIPT AND CANNOT BE TAXED AS A REVENUE RECEIPT. IT IS NOT GENERATED OR CREATED DUE TO CARRYING ON BUSINESS BUT IT IS ACCRUED DUE TO 'WORLD CONCERN '. IT HAS BEEN MADE AVAILABLE ASSUMING CHARACTER OF TRANSFERA BLE RIGHT OR ENTITLEMENT ONLY DUE TO WORLD CONCERN. THE SOURCE OF CARBON CREDIT IS WORLD CONCERN AND ENVIRONMENT. DUE TO THAT THE ASSESSEE GETS A PRIVILEGE IN THE NATURE OF TRAN SFER OF CARBON CREDITS. THUS, THE AMOUNT RECEIVED FOR CARBO N CREDITS HAS NO ELEMENT OF PROFIT OR GAIN AND IT CANNOT BE S UBJECTED TO TAX IN ANY MANNER UNDER ANY HEAD OF INCOME. IT IS N OT LIABLE FOR TAX FOR THE ASSESSMENT YEAR UNDER CONSIDERATION IN TERMS OF SECTIONS 2(24), 28, 45 AND 56 OF THE INCOME-TAX ACT, 1961. CARBON CREDITS ARE MADE AVAILABLE TO THE ASSESSEE O N ACCOUNT OF SAVING OF ENERGY CONSUMPTION AND NOT BEC AUSE OF ITS BUSINESS. FURTHER, IN OUR OPINION, CARBON CREDI TS CANNOT BE CONSIDERED AS A BI-PRODUCT. IT IS A CREDIT GIVEN TO THE ASSESSEE UNDER THE KYOTO PROTOCOL AND BECAUSE OF INTERNATIONAL UNDERSTANDING. THUS, THE ASSESSEES WH O HAVE SURPLUS CARBON CREDITS CAN SELL THEM TO OTHER ASSES SEES TO HAVE CAPPED EMISSION COMMITMENT UNDER THE KYOTO PRO TOCOL. TRANSFERABLE CARBON CREDIT IS NOT A RESULT OR INCID ENCE OF ONE'S BUSINESS AND IT IS A CREDIT FOR REDUCING EMIS SIONS. THE PERSONS HAVING CARBON CREDITS GET BENEFIT BY SELLIN G THE SAME TO A PERSON WHO NEEDS CARBON CREDITS TO OVERCO ME ONE'S NEGATIVE POINT CARBON CREDIT. THE AMOUNT RECE IVED IS NOT RECEIVED FOR PRODUCING AND/OR SELLING ANY PRODU CT, BI- PRODUCT OR FOR RENDERING ANY SERVICE FOR CARRYING O N THE BUSINESS. IN OUR OPINION, CARBON CREDIT IS ENTITLEM ENT OR ACCRETION OF CAPITAL AND HENCE INCOME EARNED ON SAL E OF THESE CREDITS IS CAPITAL RECEIPT. FOR THIS PROPOSIT ION, WE PLACE RELIANCE ON THE JUDGEMENT OF THE SUPREME COURT IN T HE CASE OF CIT VS. MAHESHWARI DEVI JUTE MILLS LTD. (57 ITR 36) WHEREIN HELD THAT TRANSFER OF SURPLUS LOOM HOURS TO OTHER MILL OUT OF THOSE ALLOTTED TO THE ASSESSEE UNDER AN AGRE EMENT FOR CONTROL OF PRODUCTION WAS CAPITAL RECEIPT AND NOT I NCOME. BEING SO, THE CONSIDERATION RECEIVED BY THE ASSESSE E IS SIMILAR TO CONSIDERATION RECEIVED BY TRANSFERRING O F LOOM HOURS. THE SUPREME COURT CONSIDERED THIS FACT AND O BSERVED THAT TAXABILITY OF PAYMENT RECEIVED FOR SALE OF LOO M HOURS BY THE ASSESSEE IS ON ACCOUNT OF EXPLOITATION OF CAPIT AL ASSET AND IT IS CAPITAL RECEIPT AND NOT AN INCOME. SIMILA RLY, IN THE 4 ITA.NO.1612/HYD/2013 & C.O. NO. 21/H/14 M/S SREE RAYALASEEMA GREEN ENERGY LTD., HYD. PRESENT CASE THE ASSESSEE TRANSFERRED THE CARBON CR EDITS LIKE LOOM HOURS TO SOME OTHER CONCERNS FOR CERTAIN CONSI DERATION. THEREFORE, THE RECEIPT OF SUCH CONSIDERATION CANNOT BE CONSIDERED AS BUSINESS INCOME AND IT IS A CAPITAL R ECEIPT. ACCORDINGLY, WE ARE OF THE OPINION THAT THE CONSIDE RATION RECEIVED ON ACCOUNT OF CARBON CREDITS CANNOT BE CON SIDERED AS INCOME AS TAXABLE IN THE ASSESSMENT YEAR UNDER CONSIDERATION. CARBON CREDIT IS NOT AN OFFSHOOT OF BUSINESS BUT AN OFFSHOOT OF ENVIRONMENTAL CONCERNS. NO ASSET IS GENERATED IN THE COURSE OF BUSINESS BUT IT IS GENER ATED DUE TO ENVIRONMENTAL CONCERNS. CREDIT FOR REDUCING CARB ON EMISSION OR GREENHOUSE EFFECT CAN BE TRANSFERRED TO ANOTHER PARTY IN NEED OF REDUCTION OF CARBON EMISSION. IT D OES NOT INCREASE PROFIT IN ANY MANNER AND DOES NOT NEED ANY EXPENSES. IT IS A NATURE OF ENTITLEMENT TO REDUCE C ARBON EMISSION, HOWEVER, THERE IS NO COST OF ACQUISITION OR COST OF PRODUCTION TO GET THIS ENTITLEMENT. CARBON CREDIT I S NOT IN THE NATURE OF PROFIT OR IN THE NATURE OF INCOME. 25. FURTHER, AS PER GUIDANCE NOTE ON ACCOUNTING FO R SELF- GENERATED CERTIFIED EMISSION REDUCTIONS (CERS ) ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) IN JUNE, 2009 STATES THAT CERS SHOULD BE RECOGNISED IN BOOKS WHEN THOSE ARE CREATED BY UNFCCC AND/OR UNCONDITION ALLY AVAILABLE TO THE GENERATING ENTITY. CERS ARE INVENT ORIES OF THE GENERATING ENTITIES AS THEY ARE GENERATED AND H ELD FOR THE PURPOSE OF SALE IN ORDINARY COURSE. EVEN THOUGH CERS ARE INTANGIBLE ASSETS THOSE SHOULD BE ACCOUNTED AS PER AS-2 (VALUATION OF INVENTORIES) AT A COST OR MARKET PRIC E, WHICHEVER IS LOWER. SINCE CERS ARE RECOGNISED AS INVENTORIES, THE GENERATING ASSESSEE SHOULD APPLY A S-9 TO RECOGNISE REVENUE IN RESPECT OF SALE OF CERS. 26. THUS, SALE OF CARBON CREDITS IS TO BE CONSIDER ED AS CAPITAL RECEIPT. THIS GROUND IS ALLOWED. 5. LD. CIT(A) RELYING ON THE ORDER OF THE COORDINA TE BENCH OF THE TRIBUNAL IN THE CASE OF MY HOME POWER LTD., (SUPRA), TREATED THE AMOUNT RECEIVED ON SALE OF CAR BON CREDIT OF RS.20,27,430 AS A CAPITAL RECEIPT. 6. AGGRIEVED, REVENUE IS IN APPEAL BEFORE THE TRIBUNAL AND THE LEARNED D.R. RELIED ON THE ORDER O F THE A.O. 5 ITA.NO.1612/HYD/2013 & C.O. NO. 21/H/14 M/S SREE RAYALASEEMA GREEN ENERGY LTD., HYD. ON THE OTHER HAND, LD. COUNSEL SUBMITTED THAT THE O RDER OF THE LD. CIT(A) IS IN CONSONANCE WITH THE DECISION O F THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF MY HOME POWER P. LTD. WHICH IN TURN WAS ALSO UPHELD BY THE HONBLE HIGH COURT OF AP AND TELANGANA AT HYDERABAD. 7. WE HAVE HEARD THE RIVAL CONTENTIONS OF THE PART IES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FI ND NO REASON TO INTERFERE WITH THE ORDER OF THE LD. CIT(A ) AS THE ITAT ORDER RELIED UPON BY THE LD. CIT(A) WAS ULTIMATELY UPHELD BY THE HONBLE HIGH COURT IN THE CASE OF CIT VS. MY HO ME POWER LTD., (2014) 365 ITR 82 (AP)/46 TAXMANN.COM 314 (A.P.). WHETHER THE RECEIPT WAS TREATED AS INCOME AND ALLOW ED DEDUCTION OR EXCLUDED AS CAPITAL RECEIPT, THERE IS NO EFFECT ON COMPUTATION OF INCOME. ACCORDINGLY, GROUNDS RAISED BY THE REVENUE HAVE NO MERIT AND ARE DISMISSED. 8. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. 9. C.O. NO. 21/HYD/2014 RAISED BY THE ASSESSEE IS W ITH REFERENCE TO THE ADHOC DISALLOWANCE AT 20% AMOUNTIN G TO RS. 33,17,637 IN RESPECT OF VEHICLE MAINTENANCE, FREIGH T INWARDS, FREIGHT OUTWARDS AND TRANSPORT CHARGES. 10. THE AO DISALLOWED 20% OF TOTAL CLAIM AT RS. 1,65,88,185/- STATING THAT ASSESSEE HAS AGREED FOR THE EXPENDITURE. IT WAS CONTENDED BEFORE THE LEARNED CI T(A) THAT ASSESSEE HAS NOT AGREED FOR THE ABOVE DISALLOWANCE. THE LEARNED CIT(A), HOWEVER, RELYING ON VARIOUS DECISIO NS DISMISSED THE GROUND STATING THAT ASSESSEE DOES NOT HAVE A RI GHT TO APPEAL AGAINST AN AGREED ADDITION. 6 ITA.NO.1612/HYD/2013 & C.O. NO. 21/H/14 M/S SREE RAYALASEEMA GREEN ENERGY LTD., HYD. 11. BEFORE US, IT WAS THE CONTENTION OF THE LEARNED AR THAT ASSESSEE HAS NOT AGREED FOR THE DISALLOWANCE AND, T HEREFORE, IT WAS CONTESTED. SINCE NO OPPORTUNITY WAS GIVEN, IT W AS REQUESTED FOR RESTORING THE ISSUE TO THE FILE OF TH E CIT(A) TO EXAMINE THE SAME. 12. THE LEARNED DR, HOWEVER, SUBMITTED THAT ASSESSE E COULD NOT FURNISH THE DETAILS OF EXPENDITURE AND MOST OF THE EXPENDITURE HAD BEEN MET IN CASH, FOR WHICH DETAILS OF TDS WERE NOT FURNISHED. ACCORDINGLY, DISALLOWANCE WAS M ADE BY AO AND AS STATED IN ORDER THE ADDITION WAS AGREED. 13. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE ARE UNABLE TO ACCEPT THE LEARNED DRS CONTENTIONS. IF THE EXPENDI TURE, WHICH WAS UNVERIFIABLE WAS DISALLOWED, THE SAME WOULD INC REASE PROFIT OF THE ASSESSEE COMPANY AND THE NECESSARY AL LOWANCE U/S 80IA HAS TO BE GIVEN ON THE SAME AMOUNT WHEREAS THE AO HAS DISALLOWED AND ADDED TO THE RETURNED INCOME, WH ICH IN OUR VIEW, IS NOT CORRECT PROCEDURE. THE LEARNED CIT(A) ALSO SEEMS TO HAVE NOT GIVEN ANY OPPORTUNITY BEFORE DISMISSING TH E GROUND ON THE REASON THAT ASSESSEE HAS NO RIGHT TO APPEAL ON AGREED ADDITION. THIS IS ALSO NOT CORRECT. ASSESSEE SPECIF ICALLY RAISED A GROUND BEFORE THE LEARNED CIT(A) THAT THE ADDITION WAS NOT AGREED. AT LEAST, THE CIT(A) SHOULD HAVE EXAMINED T HE ASSESSMENT RECORD SO AS TO ASCERTAIN WHETHER THE AS SESSEE HAS GIVEN CONSENT FOR SUCH ADDITION BEFORE THE AO. SINC E THESE ASPECTS WERE NOT CONSIDERED EITHER BY THE AO OR BY THE CIT(A), WE ARE OF THE VIEW THAT THE ISSUE REQUIRES RE-EXAMI NATION BY THE AO AND, HENCE, WE DIRECT AO TO EXAMINE AFRESH A ND MAKE DISALLOWANCE, IF ANY REQUIRED, SUBJECT TO ALSO CONS IDERING THE SAME FOR DEDUCTION U/S 80IA AS APPLICABLE. WITH THE SE 7 ITA.NO.1612/HYD/2013 & C.O. NO. 21/H/14 M/S SREE RAYALASEEMA GREEN ENERGY LTD., HYD. OBSERVATIONS, ASSESSEES C.O IS CONSIDERED ALLOWED FOR STATISTICAL PURPOSES. 14. TO SUM UP, REVENUE APPEAL IS DISMISSED AND THE C.O. IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 13. 08.2014 SD/- SD/- (ASHA VIJAYARAGHAVAN) (B.RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 13 TH AUGUST, 2014 VBP/- COPY TO 1. DCIT, CIRCLE 3(2), 7 TH FLOOR, B BLOCK, I.T. TOWERS, A.C. GUARDS, HYDERABAD 500 004. 2. M/S. SREE RAYALASEEMA GREEN ENERGY LTD., 1-10-19 , STREET NO.3, ASHOK NAGAR, HYDERABAD. 3. CIT(A)-IV, HYDERABAD 4. CIT-III, HYDERABAD 5. D.R. A BENCH, ITAT, HYDERABAD.